Early repayment of a home loan and allowances

Ronnie Perkins · Posted onApril 12, 2019

What the law says

Article L312-21 of the Consumer Code amended by Law No. 99-532 of 25 June 1999 on savings and financial security entitles the borrower to make a repayment of his real estate loan by anticipation at any time and thus unilaterally break his contract.

In case of partial repayment, the legislation allows the credit institution to require a minimum amount of repayment of the mortgage loan of 10% of the initial loan. The borrower must further inform the lender of his intentions by registered mail with acknowledgment of receipt and comply with a 30-day notice.

In addition, the bank may request an early repayment indemnity in respect of interest not collected, the amount of which may not exceed a limit fixed by decree. In addition, the methods for calculating the indemnity must be included in the loan agreement.

At present, the maximum allowed by the Law is 3% of the outstanding capital shown in the amortization table.

For loans taken after July 1, 2009 , the law prohibits the payment of a penalty if the early repayment of the real estate loan occurs in the following cases:

Sale of the principal residence following a professional transfer.

Forced cessation of activity (dismissal or disability)

Death

Job Loss.

These cases apply to both the borrower and the spouse.

Case of the default of the borrower

Article L312-22 of the Consumer Code clearly states that in the event of default by the borrower , the bank has the right to increase the interest rate on the loan until the borrower resumes payment of the monthly payments. This increase, however, has a limit fixed by decree.

In addition, the lending institution has the right to require the immediate repayment of outstanding capital and accrued interest, plus default interest. This situation does not prevent him from claiming further compensation for damage (limited by decree), in addition to the various costs that the recovery procedure would have occasioned.

Calculation of prepayment penalties

The calculation clause of the prepayment allowance for the real estate loan must be specified in the loan offer and clearly indicate the legal limit. This is often equal to one semester of interest on the amount reimbursed in advance calculated at the average loan rate, but limited to 3% of the outstanding capital.

The case of relay and loans

An exception is made for certain loans. These are bridge loans and zero interest loans that can be repaid without notice or penalties.